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Mid-Caps Are the Sweet Spot

Now that you have a strong core, you’ll want to put about 40% of your 401(k) money into mid-cap funds. My favorite for this role at Vanguard is Vanguard Selected Value (MUTF:VASVX) fund. The fund’s primary managers, Jim Barrow and Mark Giambrone, are quintessential value guys looking for stocks selling below the market’s multiples and yet generating a decent yield. Barrow always has said he’s happy being paid a dividend while waiting for his companies’ shares to take off. And Barrow has a good chunk of his own dough in Selected Value, a nice vote of confidence.

If your plan doesn’t hold Selected Value, you could ask for it, or use an index duo as an alternative: Vanguard Mid-Cap Growth Index (MUTF:VMGIX) and Vanguard Mid-Cap Value Index (MUTF:VMVIX).

Why not just buy Vanguard Mid-Cap Index (MUTF:VIMSX) instead? Splitting your money between the growth and value funds gives you the flexibility to shift your weighting depending on market conditions.

At the moment, you’d want to overweight the growth side of the ledger. The value index has a hefty weighting to financials, which still are under a regulatory cloud, while the growth index is heavier in tech, which could gain momentum as the economy improves.

Best Vanguard International Funds

In 2011, as the European debt crisis came to the fore, holding international stocks hurt. Every one of Vanguard’s international funds lost money, with the best performer (which diluted its foreign stock stake with hefty domestic holdings) being Total World Stock (MUTF:VTWSX), down 7.9%.

So why hold international stocks at all? In the emerging markets, stock market declines are at odds with economic expansion. And don’t forget, when markets take a tumble, that’s also when good managers find the best values.

Which brings us to my next pair of favorite funds. Vanguard has some stellar choices for international investment, and Vanguard International Growth (MUTF:VWIGX) is one of my favorites. There’s a good chance it’s available in your 401(k).

Overseen by three management teams, International Growth still demonstrates strong concentration with only about 180 stocks and 18% of the portfolio in the top 10. Plus, the managers aren’t afraid to commit money to emerging markets, which you might not find in many broad international funds.

Even so, I still think you’ll want to put some money directly into this next fund: Vanguard Emerging Markets Index (MUTF:VEIEX). Why emerging markets? Globally, these countries are showing increased economic firepower, hungry consumers and the ability to take advantage of newly aggressive importers, exporters, manufacturers and entrepreneurs. Emerging Markets Index will give you access to several of these economies, including one of the most powerful investment markets out there — China — with about 18% of its assets there.

In addition, Emerging Markets has investments in Brazil (about 15%), Korea (16%) and Taiwan (10%). In the long term, I think these economies offer great growth opportunities and, at current prices, we’re buying in almost 20% cheaper than we could have a year ago.